Accountancy · Ch 7 — Issue and Redemption of Debentures
Redemption by Conversion
Redemption by Conversion
Redemption by Conversion
When a company does not have enough cash to redeem its debentures, or when it wants to offer an attractive alternative to debenture holders, it can redeem them by converting them into something else. The debentures are exchanged for equity shares, preference shares, or new debentures of the same company. This is called redemption by conversion.
The decision to convert is entirely the debenture holder's. If the offer (e.g., shares at a favourable price) is beneficial, they will accept it. If not, they can refuse and demand cash payment instead.
Key Accounting Principle
The conversion is treated as a two-step process in the journal:
- First, record the liability due to the debenture holders. This is done by debiting the Debentures Account (to close it) and crediting the Debentureholders Account (to show the amount owed to them).
- Second, record the issue of shares or new debentures in satisfaction of that liability. This is done by debiting the Debentureholders Account (to show the liability is settled) and crediting the relevant Share Capital or Debentures Account.
The new shares or debentures can be issued at par, at a premium, or at a discount. The accounting treatment for the premium or discount follows the same rules as a normal issue of shares or debentures.
Summary of the Conversion Process
- Calculate the amount due to the debentureholders (usually the face value of the debentures).
- Calculate the number of shares/new debentures to be issued based on the issue price (face value + premium - discount).
- Pass the first journal entry to close the Debentures Account and create the liability to the Debentureholders Account. If the debentures were issued at a discount or premium, adjust the Discount on Issue or Securities Premium accordingly. …